ENERGY STOCKS HIT HARD -- MATERIALS SECTOR DECLINES SHARPLY -- QQQQ FALLS AFTER STRONG OPEN -- RIMM AND DELL LEAD LOWER -- OIL GAPS DOWN -- NATURAL GAS AND GOLD FOLLOW OIL -- DOLLAR EXTENDS ITS GAINS

ENERGY STOCKS LEAD THE MARKET LOWER... Today's Market Message was written by Arthur Hill. John Murphy will return next week. - Editor

A sharp decline in crude sparked broad selling pressure in energy stocks on Tuesday. The Energy SPDR (XLE) led the sectors lower by declining over 5%. Chart 1 shows XLE gapping down and closing weak. Today's sharp decline reinforces resistance around 77.5. Notice that the ETF broke its 200-day simple moving average (SMA) in July and then met resistance at the 200-day moving average in August. With a reaction high in late August, we can now draw a trend line extending down from the early July high. Even though XLE has potential support around 70 from the March and August lows, it must overcome Tuesday's gap and decline before we can take a bounce seriously. A move above the August high would fill the gap, erase the decline and break resistance. Until then, the bears control XLE.

Chart 1

MATERIALS SECTOR FAILS AT RESISTANCE... The Materials SPDR (XLB) was also hit hard with a 2.69% decline on Tuesday. Chart 2 shows XLB breaking support in early July and broken support turning into resistance around 41. The ETF failed to break this resistance area in late July and again in August. With today's sharp decline, resistance has been further reinforced and the bears are in control. The bottom indicator window shows the price relative (XLB:SPY Ratio), which compares the performance of XLB with the S&P 500 ETF (SPY). The price relative rises when XLB shows relative strength and falls when XLB shows relative weakness. As with the Energy SPDR, the Materials SPDR (XLB) shows relative weakness with a declining price relative.

Chart 2

STRONG OPEN AND WEAK CLOSE... Outside of the energy and materials sectors, stocks opened with a bang this morning, but gave back early gains and closed weak. Large techs bore the brunt of selling pressure and this pushed the Nasdaq 100 ETF (QQQQ) down 1.24%. Chart 3 shows QQQQ opening strong and closing weak to form a long black candlestick. Selling pressure took over after the first hour and the ETF closed near its low for the day. With a move below 46, the early August breakout did not hold and QQQQ is looking vulnerable to further weakness. The ETF has been declining steadily since mid August with a series of lower lows and lower highs. A break above last week's high is needed to reverse the three-week fall. Charts 4 and 5 show two of the culprits. After an earnings miss, DELL gapped down on Friday and fell sharply again on Tuesday. RIMM broke support with a gap down on Friday and also continued sharply lower on Tuesday.

Chart 3

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Chart 5

OIL LEADS COMMODITY DECLINE... Oil kicked off a commodity meltdown with a sharp decline on Tuesday. The United States Oil Fund ETF (USO) held firm last week as Hurricane Gustav headed towards the Gulf Coast. However, storm damage was minimal and this sparked selling pressure in oil. Chart 6 shows USO gapping below $90 to continue a major correction that started in mid July. As the chart clearly shows, this decline was well underway before the hurricane and there are other reasons for selling pressure. Less demand from a weakening global economy shares part of the blame. USO also broke below its 40-week SMA, which is equivalent to the 200-day. The yellow rectangle marks the next support zone or downside target.

Chart 6

NATURAL GAS AND GOLD FOLLOW OIL ... Oil was not alone as the Natural Gas ETF (UNG) and the streetTRACKS Gold ETF (GLD) also plunged. Chart 7 shows UNG plunging over 40% in the last nine weeks. The ETF made a round trip in 2008 with a surge from the mid 30's to the low 60's and back down again. UNG has potential support around 33-35 from the 2007 lows, but remains in a free fall right now. Chart 8 shows the streetTRACKS Gold ETF gapping down below $80 today. Gold firmed after the gap and managed to move higher throughout the day, but still ended with a loss. Notice that GLD has support around 77.5 from the November lows and 62% retracement. The ETF needs to fill today's gap to reinforce this support level.

Chart 7

Chart 8

DOLLAR INDEX EXTENDS GAINS... With commodities falling sharply, the U.S. Dollar Index extended its surge by moving to its highest levels of 2008. Chart 9 shows the U.S. Dollar Index ($USD) finding support around 71 in July, breaking above its June highs and then moving above its January high. The index also broke above the 40-week SMA in early August, and the long-term trend for the greenback is turning the corner. Chart 10 shows the negative correlation between the U.S. Dollar Index and Oil. From May 2007 to June 2008, West Texas Intermediate Crude ($WTIC) advanced from the low 60's to the low 140's (up around $80). During this time frame, the U.S. Dollar Index fell from 83 to 72 (down around 11 points). Notice that oil started it off with a sharp decline in early July (red arrow and dotted line). The U.S. Dollar Index ($USD) did not make its big surge until early August with a move above 75 (green arrow and dotted line). Regardless of who is leading whom, the inverse relationship is clear. Oil falls as the Dollar rises.

Chart 9

Chart 10